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Commercial common sense will not save ambiguous contracts

Introduction
The case of Balfour Beatty Regional Construction Limited v Grove Developments Limited [2016] EWCA Civ 990 caused some waves earlier this year. The Court held that due to a payment schedule only providing for 23 payment cycles, up to the contractual date for practical completion, Balfour Beatty was not entitled to further interim payments after this date, even when the date for practical completion was significantly extended.

Unsurprisingly, Balfour Beatty appealed against the decision. The appeal judgment is now available.

Background and Decision at First Instance
In 2013 Grove engaged Balfour Beatty to design and construct a hotel and serviced apartments at Greenwich Peninsular, London. The contract was an amended JCT Standard Form Design and Build Contract 2011. The parties agreed a Payment Schedule of 23 valuations and interim payment dates prior to the completion date.

The project ran over the estimated completion date of 22 July 2015. On 21 August 2015 Balfour Beatty applied for a 24th interim payment. On 15 September 2015 Grove issued a Pay Less Notice in respect of the 24th application, deducting £2million.

Grove then initiated proceedings seeking a declaration to the effect that Balfour Beatty had no entitlement to interim payments in respect of work done after July 2015. The Court at first instance found in favour of Grove, granting the declaration.

Court of Appeal – Lord Justice Jackson and Lord Justice Longmore (majority)
Balfour Beatty was unhappy with the decision at first instance and therefore sought to appeal it. The three issues the Court of Appeal was asked to consider were:

Did Balfour Beatty have any contractual entitlement to interim payments after valuation 23?

Do the Housing Grants Construction and Regeneration Act 1996 and related Scheme for Construction Contracts 1998 enable Balfour Beatty to recover interim payments after July 2015?

Did the parties reach a separate agreement for interim payments after valuation 23?

1. Did Balfour Beatty have any contractual entitlement to interim payments after valuation 23?
Lord Justice Jackson held: “The parties made no agreements as to whether or how they would deal with interim payments after July 2015.”

Balfour Beatty submitted that to interpret the contract as prohibiting interim payments beyond the payment schedule dates was a commercial nonsense. The parties would never have agreed to that, and instead the Court should interpret the payment schedule as providing a continuing entitlement to interim payments after July 2015. Lord Justice Jackson rejected this for three reasons;

The express words used make it clear that the parties were only agreeing a regime of interim payments up to the contractual date for practical completion.

It is impossible to deduce from the hybrid arrangement what the dates for valuations, payment notices, Pay Less notices and payments after July 2015 would be.

This is a classic case of one party making a bad bargain. The Court will not, indeed cannot, use interpretation to rescue one party from the consequences of what that party has clearly agreed. There was no ambiguity which enabled the Court to go beyond the words used in order to ‘reinterpret’ the parties’ contract in accordance with “commercial common sense”.

Lord Justice Jackson also rejected Balfour Beatty’s reliance on Arnold v Britton [2015] UKSC 36 stating: “Commercial common sense can only come to the rescue of a contracting party if it is clear in all the circumstances what the parties intended, or would have intended, to happen in the circumstances which subsequently arose.”

Lord Justice Jackson also rejected Balfour Beatty’s fall-back position, that it was implied into the contract that interim payments would continue beyond July 2015.

2. Do the 1996 Act and related 1998 Scheme enable Balfour Beatty to recover interim payments after July 2015?
Lord Justice Jackson was satisfied that the payments schedule satisfied the requirements of the 1996 Act. He was also satisfied that the payments clause, clause 4.14 of the contract, satisfied the requirements the 1996 Act. The result was therefore that Balfour Beatty could not rely on the Scheme or the Act to recover payment.

3. Did the parties reach a separate agreement for interim payments after valuation 23?
Lord Justice Jackson also found that the parties had not agreed the dates for valuations, notices and payments after valuation 23. He rejected Balfour Beatty’s argument that Grove waived their right to object by issuing a later payment notice 24.

For these reasons, Lord Justice Jackson held that the appeal ought to be dismissed.

Lord Justice Longmore, agreeing with Lord Justice Jackson, found it was idle to speculate why the parties had not agreed interim payments beyond contractual practical completion. Agreeing with Jackson LJ on the point of construction, he also found that the appeal should be dismissed.

Lord Justice Vos dissented, finding the contract payment terms and payment schedule to be ambiguous, so entitling the court to consider what the parties must have intended, which was for payment dates to continue up to the date of actual completion, rather than just the contractual completion date.

Conclusions
This decision reinforces the position stated in Arnold v Britton that commercial common-sense now has a smaller role in interpreting contracts than formerly. The words used will be given their ordinary meaning. Only if the words are ambiguous will the courts consider how commercial common-sense might influence the meaning to be given. This is even where the ordinary meaning leads to a harsh result for one party.

This position calls for careful drafting even more so than before; the courts will not rescue the parties from a bad bargain where that is the result of the wording used. Drafting should therefore be clear and concise and leave no room for ambiguity. That exercise calls for skill and experience. This is so given the imprecision of the English language at times and also the fact that clarity is more likely to be achieved by using a proper drafting structure and approach.